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Tuesday July 22nd 2014

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Who Wins?

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I got to thinking about “who wins” when the global monetary and banking system goes down?  Hardcore gold bugs will tell you “only those who have metal.”  I think that this is wrongheaded thinking because when this ship goes down we will all lose.  The words of one of the world’s biggest metals money manager to me several years back will ring true I believe, “Who wants to be the richest guy in a world where it’s not safe to walk the streets and can’t enjoy life because nothing’s open?”  Don’t get me wrong, owning metal will “ease your pain” but it will not be a magic lamp you can rub to make everything better.

From a macro standpoint, who wins?  In this case I think it will be a different story.  Here I believe that the winners will be the countries who have accumulated gold and the losers will be those that divested.  I also believe that there will be (are) countries that do not know they have “divested” but will soon find out.  Germany being the prime example here as they were told that it would take 7 years to repatriate a measly 300 tons from N.Y., in this case Germany already knows that they have had some “leakage.”

My original thoughts on this topic came from reading a Zerohedge article this morning that said “China warns of big bank failures.”  I thought to myself this is the third or fourth time that overnight rates have spiked out of fear that some banks would lock up.  They have levered their real estate market and banking system as high as or even higher than ours so risk of a black swan event from China is as high as anywhere else.  Ah…but, they have imported massive amounts of gold over the last 3-5 years.  I would be shocked if they haven’t accumulated at least 5,000-6,000 tons.  In fact, I would not even be surprised if we eventually found out that they have 8,000 or even 10,000 tons.

Going back to the title “Who Wins,” China does.  If (when) it turns out that the current monetary system collapses in a heap, the clear sovereign winner WILL be whoever has the most gold.  Think about it this way, if “everything paper is worth nothing” then the winner will be whoever has the most of whatever is worth “something.”  This “something” when it comes to “money” is and has been for 5,000 years, gold.  For years the West has quietly and secretly divested gold in an effort to prop up their currencies and retain “power.”  Some (many) countries were a part of this effort without even knowing about it.  Germany comes to mind, Portugal, Finland and others also as they have leased out a major portion yet still believe they “own” gold.  Much of this gold is simply gone and will never come back.  Britain, Canada and Australia also make this list as they outright have already sold much or all of their gold.

Even though China has levered itself beyond “survival capacity” they have done something very smart.  I equate what they have done with gold as something similar to a homeowner taking on huge amounts of debt yet have physical metal equal to or more what their debt totals.  In this manner a homeowner can “sleep at night.”  Yes I know the leverage in China is far and above the value of their gold holdings…currently…and at today’s prices.  This leads me to just a little bit more to explain.

I have read several opinions that suggest the Chinese themselves may be a part of the current metals price suppression scheme, this does make some sense and I believe it is quite possible.  China has every motive I can think of to keep gold prices “low.”  They know that there is only so much gold to be had, why would they “pull the plug” on their reserve holdings while they could still accumulate more gold by using them?  This topic I believe was part and parcel of the mid and late 2011 high level meetings between the U.S. and China.  It would not surprise me one bit if a deal was struck where the Chinese would not liquidate Treasury holdings in size as long as gold was still being delivered.  This could also explain the meltdown of inventories at the COMEX, GLD and 1,300 tons “disappearing” from London.

In any case, as I mentioned above, the “current” gold holdings of China.  China doesn’t care “what it’s worth” NOW.  They only care how much “weight” they have because in my opinion the old story of “he who has the gold makes the rules” will apply.  THEY will re price gold to much much higher levels once there is no more in any sizeable quantity to be had.  They won’t care what their dollar holdings will be worth, they will only care about what their gold holdings will be “worth”…AND they will essentially “dictate” this.

Is this speculation on my part?  Yes of course it is.  Does it make sense?  I think so, I think it is just basic common sense which the Chinese have and we lost as a nation or even a culture many years ago.  No matter what, it is clear that the Chinese now have at a minimum the second largest gold holding in the world if you believe that the U.S. still has 8,300 tons.  If we do not have this stash (which I entirely believe that we do not) then the Chinese have amassed the largest holding.  Which… if history is any guide makes them the “winners.”  It will also allow them to “make the rules.”

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